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19.08.2008Should I add to super or pay off debt?

I am a 57 yr old part time female worker working 2 days a week as a nurse. My hubby is a process worker working 38hrs week and has a second job delivering Pizza. My 3 children stay as at home with the eldest working full time this year and the twins still in 3rd year uni. We have a total loan of $500,000 for an investment property unit in Fairy Meadows (near Wollongong NSW) for $250,000 with ANZ Bank and LOC with ING Bank for $250,000 with our house as security for investment in shares and property development. I am behind in superannuation with SASS in the old defined benefit scheme with pension option which cannot be converted into the new TRAP or any other schemes. Should I put any excess money into my new superannuation FSS which I started with $10,000 last year or should I pay into reducing debt as they are tax deductible?

Today's expert: Jeremy Gillman-Wells, Bentham Financial Group

Answer:

Making a decision on allocation of your precious income is always a hard one - be it expenditure for lifestyle, paying for children's education, reducing your mortgage, saving for retirement...the list goes on. Then there are the endless investment choices - cash, shares, property, managed investments, CFDs...

The bad news is that there is no one answer that suits everybody. "Should I do A or B" comes down to your goals at the time, legislation at the time and your age when making the decision. This is why it is so important to regularly come back to your plan and review whether what you have in place makes sense.

The good news is that there are some general principles to go by based purely on the numbers.

Many people have moved into lower marginal tax rates with the changes in personal tax scales over the recent years. This means that tax minimisation strategies (including negative gearing) have become less effective. Where you may have been getting 40 cents in the dollar back before, now you are only getting 30 cents. And 10 cents less tax return on the interest cost of $500,000 borrowed can hurt, because it means YOU have to put the money in to sustain the investment rather than the taxman!

As a starting point, paying off debt which is tax deductible is not tax effective. Firstly, in order to repay the bank, you have to receive money in the hand which has already been taxed at your marginal rate - say 31.5%. Then you are reducing your future tax deductibility because you will pay less interest next year. So reducing your interest cost may be better for next year's cashflow but it's not great tax planning.